Fitch: Falling Commodity Prices Spur Midstream M&A

NEW YORK--()--Falling commodity prices and expectations for slowing growth has begun to pry loose midstream assets housed in exploration and production (E&P) companies, according to Fitch Ratings. Midstream assets' valuations have held up well even as prices have fallen. Such asset sales could help provide capital needed to cover funding short falls associated with oil at the $50 price level.

Fitch expects lower commodity prices may also have an indirect effect on select midstream and master limited partnership (MLP) names, specifically those with direct exposure to commodity prices or names with limited asset and geographic diversity and less robust growth backlogs as upstream names scale back production.

We expect midstream MLP credit quality will be under pressure as smaller, growth challenged MLPs try to maintain distribution growth. We believe continued pressure will drive commodity exposed midstream issuers to diversify and scale up operations in an effort to more effectively grow and maintain cash flow stability. Slower production growth will lead to limited opportunities for midstream providers to grow, particularly for names with limited geographic or business line diversity and prompt merger activity.

Larger investment-grade midstream names are likely to be acquirers as they are better positioned from a liquidity and capital market access standpoint to take advantage of opportunities to purchase assets that help further provide scale, geographic or business line diversity, or provide a nice platform for future growth. Fitch expects this mergers and acquisitions (M&A) consolidation trend to accelerate as upstream production contracts and E&P names look to fill funding gaps with asset sales and smaller scale, sub-investment grade midstream names struggle with future growth. This trend is starting to emerge with recent increased merger activity in the midstream space. The credit ramifications for midstream names expected to be neutral to positive should prices paid be reasonable and the assets acquired offer operational benefits.

Last month, Kinder Morgan Inc. (KMI [BBB-/Stable]) kicked-off midstream acquisitions for 2015 announcing it would buy Hiland Partners, LP for $3 billion including the assumption of roughly $1 billion of Hiland debt from Harold Hamm CEO of Continental Resources. Energy Transfer Partners, LP (ETP [BBB-/Stable]) soon followed with its own transaction announcing the acquisition of affiliate Regency Energy Partners, LP (RGP; [BB/RWP]) in a unit-for-unit transaction valued at roughly $18 billion including the assumption RGP debt. Low commodity prices had weighed on RGP's ability to fund accretive growth and the transaction provided ETP an opportunity to fund that growth its lower cost of capital and consolidate midstream assets across multiple basins.

Elsewhere, several other midstream transactions are expected in the near to intermediate term. Pioneer Natural Resources Company (PXD; BBB-/Stable) announced on Feb. 4 that it was pursuing the sale of its 50.1% stake in its Eagle Ford Shale Midstream business, EFS Midstream. PXD's sale of is being pursued to allow PXD to redeploy capital in other core production areas. The asset sale has been rumored to be in the $3 billion range.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Peter Molica
Senior Director
Corporate Finance
+1 212-908-0288
33 Whitehall Street
New York, NY
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Peter Molica
Senior Director
Corporate Finance
+1 212-908-0288
33 Whitehall Street
New York, NY
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com